While the Australian economy as a whole is growing, certain industry groups perform better than others. Analysing the performance of each sector can provide investors with important insights, which will assist in making educated investment decisions.
How have the individual industry groups, also known as sectors, performed on the ASX so far this year? Australia’s most tracked benchmark index, the S&P/ASX200 (‘ASX 200’) consists of the largest 200 companies listed on the Australian Securities Exchange (ASX) and is up 2.5% so far this year (as of 30 May 2016). The ASX 200 is often broken down into ten sectors as each company belongs to a certain sector or industry.
As at 29 April 2016, the industry breakdown and the respective weight on the market is as follows:
Image: ASX200 industry breakdown as at April 2016. Source: Standard & Poor’s
The weighting of the Financials sector remains significant with financial companies making up nearly 46% of the entire index. The four largest companies by market capitalisation are the ‘big four banks’. The table below shows the ten largest companies listed on the ASX:
Table: The largest companies on the ASX200 by market capitalisation. Source: Standard & Poor’s
ASX Performance in 2016: Materials & Health Care Outperform; Financials down
The ASX200 has gained 2.5% so far this year and now that we understand the composition of Australia’s benchmark index, we will assess the performance of each sector. The term year-to-date refers to the period 1 January 2016 to 30 May 2016.
Please note: All data is based on the closing price of 30 May 2016. No guarantee can be made about the accuracy of the data.
Table: Performance of the ASX sectors January to May 2016
Materials – up 14.3%
The Materials and Resources sector has been the driver on the ASX in 2016, up more than 14%. The 14% rise comes on the back of a 20% fall in 2015, which indicates that this year’s rise is a ‘recovery’ rather than anything else. A number of key commodities have rebounded during the first five months of the year, which has propelled valuations higher as investors gain confidence that higher prices will yield higher margins, and ultimately enable miners to operate profitably. Australia’s largest diversified miner BHP Billiton (ASX:BHP) is up 8% while RIO Tinto (ASX:RIO) is flat.
Health Care – up 10.7%
The Health Care sector is often considered to offer profitable exposure to favourable macroeconomic trends. Generally speaking, demand for health care services is expected to increase due to growing population and rising consumer wealth. Nevertheless, pressure to reduce costs is escalating and an ageing population may force health payers to make difficult benefit decisions.
Australia’s Health Care sector continues to expand as rising company profits support high share price valuations. The sector has appreciated nearly 11% year-to-date, buoyed by CSL Limited (ASX:CSL) up nearly 10% and currently valued at $53bn. Other health care providers that have outperformed year-to-date include: Ramsay Health Care (ASX:RHC) up 6.5%, Sonic Healthcare (ASX:SHL) up 19.5% or Resmed Inc (ASX:RMD) up 9.4%.
Industrials – up 9.2%
The value of the leading twenty Industrials shares has increased 9.2% in 2016, buoyed by gains in CIMIC Group (ASX:CIM), Transurban Group (ASX:TCL) or Sydney Airport (ASX:SYD). CIMIC Group is one of the best performing stocks on the ASX200 so far this year, up ~55%, as the company secured a number of projects, successfully completed the acquisition of Sedgman Group and continues to enjoy momentum in profit growth.
Domestic manufacturing activity continues to expand as the Manufacturing PMI remains above the ‘50 level’ for ten consecutive months – the most consecutive months since 2006. Any level above 50 signals expansion while a reading below 50 indicates contraction. High manufacturing activity, coupled with strong demand for housing and population growth usually results in growing demand for industrial services. The depreciation of the Australian Dollar is still a central source of strength for the sector assisting growth in exports and import-competing sales. However, some sectors experience mixed conditions due to tight margins, high competition and exposure to low commodity prices, which may indicate a slowdown for the industry - but it remains to be seen.
Energy – up 4.5%
The Energy sector was the worst performing sector in 2015 as plummeting crude oil prices raised concerns about the profitability and balance sheet strength of the entire industry. Oil and gas explorer Origin Energy (ASX:ORG) posted a statutory loss of $658million, following a number of impairments, before being forced to raise $2.5billion in capital. Woodside Petroleum (ASX:WPL) as well as Oil Search limited (ASX:OSH) have been somewhat volatile this year as both companies failed to gain significantly despite the recent oil price strength. Last year both parties initiated talks to merge but abandoned discussions in December
Utilities – up 4.4%
The ASX defines the Utilities sector as the industry group that “encompasses those companies considered to be electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.” Utilities is often considered to be a yield sector offering profitable exposure to stable companies, which may not experience stable growth but therefore distribute income to patient investors. However, during 2015 investors favoured utilities stocks, driving prices 17.4% higher and making it the best performing sector on the ASX. Conditions remain favourable as the sector is up 4.4% year-to-date. Following several strong years of growth, the sector is only ~6% below its all-time high reached in May/June 2007.
APA Group (ASX:APA) and AGL Energy (ASX:AGL) have the strongest weight on the sector and are up 0.5% and 2% respectively.
Discretion – up 3.6%
Consumer Discretionary or ‘Discretion’ is up 3.6% so far this year. This sector refers to companies that sell ‘nonessential’ goods and services and may contain retailers, media companies or consumer services companies. Some of standout performers have been gaming machine manufacturer Aristocrat Leisure (ASX:ALL) up 25%, casino operator and Wise-owl pick The Star Entertainment Group (ASX:SGR) up 11% or pizza chain operator Domino’s Pizza (ASX:DMP) which has risen 20% YTD.
Telecommunications – up 3.6%
Telecommunications is up 3.6%, slightly ahead of the market as the industry continues to experience modest growth due to robust demand and developments in technology. Market leader Telstra Limited (ASX:TLS) has a market capitalisation of nearly $70bn and makes up more than 50% of the sector weight. TLS has gained ~1% since the beginning of the year. The remaining three major participants TPG Telecom (ASX:TPM), Vocus Communications (ASX:VOC) and Spark New Zealand (ASX:SPK) have also been travelling in long-term uptrends and investors are being rewarded with double-digit growth.
Information technology – up 2.5%
Information Technology has advanced 2.5% so far this year. The IT sector makes up only 1.1% of the ASX200, while, as a comparison, it is the largest sector on the S&P 500 in the US. Share registry services provider Computershare Limited (ASX:CPU) has the strongest weight on the sector, down 7.4% for the year, followed by competitor Link Administration Holdings (ASX:LNK) which has gained 16%. Wise-owl pick Carsales (ASX:CAR) has edged 8.9% higher since the beginning of the year.
Consumer Staples – down 1.8%
Consumer Staples is one of the worst performing sectors on the ASX. The strongest weighting on the sector have diversified retailer Wesfarmers (ASX:WES) as well as Woolworths (ASX:WOW) as both stocks have underperformed so far this year. There a number of companies which have gained significantly during the past 12 months but investors have recently re-assessed valuations: Bellamy’s (ASX:BAL), the A2Milk Company (A2M) or Blackmores (ASX:BKL).
Financials – down 3.3%
The largest sector on the ASX, the Financials sector, has been a drag on the stock market so far. The sector is down 3.3% year-to-date making it the worst performing sector this year. All major banking stocks have lost some of their market value year-to-date: Commonwealth Bank (ASX:CBA) is down 9%, Westpac Group (ASX:WBC) and ANZ Bank (ASX:ANZ) have shed 8% each and NAB lost 10%. Second-tier banks Bendigo and Adelaide Bank (ASX:BEN) and Bank of Queensland (ASX:BOQ) are down 14% and 16% respectively. The value of Australia’s largest investment bank Macquarie Group (ASX:MQG) is 10% below the level of the beginning of the year.
Insurance providers have performed mixed with AMP Limited (ASX:AMP) and QBE Insurance (ASX:QBE) slightly down this year, however Insurance Australia Group (ASX:IAG) or Suncorp (ASX:SUN) have outperformed.
There are a number of reasons why financial stocks have underperformed in 2016. Earlier this year we have seen a lot of market volatility on global stock markets, which usually hits financial stocks first. Australia’s banks – which are relatively healthy on an international level – have gained significantly during the past few years, thus investors are inclined to reduce exposure if market sentiment shifts. The banks seem to operate in a more challenging environment than a few years ago due to macroeconomic as well as domestic challenges or stricter regulations, which has forced nearly all banks to raise capital. While the last few sets of quarterly results were robust, valuations often incorporate a degree of ongoing growth following a multi-year bull market, and it becomes increasingly challenging to ‘impress’ the market or justify these high valuations if growth slows down.